Down rounds not bad if business model is right: Paytm's Vijay Shekhar Sharma

The era of easy money is over for startups and valuations are coming down to more realistic levels as investors tighten the purse strings. How should entrepreneurs tackle the tough times ahead? Develop a thicker skin, don't follow others blindly and seek to solve a larger problem. Those were among the tips offered by Paytm founder and CEO Vijay Shekhar Sharma at the Techcircle Startup 2016 summit in Bengaluru.

At a fireside chat with Raju Narisetti, senior vice president, strategy, News Corp (the parent of VCCircle), Sharma also talked about the Indian investment ecosystem, his investment mantra and why startups shouldn't reject funding offers at a lower valuation. Here is a summary of the chat.

Investments seeing full cycle
Over the last three years, the Indian startup ecosystem has seen a full cycle of investments—from early-stage funding to mid- and late-stage funding, exits, mergers and acquisitions and initial public offerings (IPOs), according to Sharma.

"Big-ticket funding in India is being driven more by Asian conglomerates like Alibaba, SoftBank and Tencent which have been quicker in identifying the potential of companies in the country. It is unique that Asian funds are driving valuations here," said Sharma.

'Fast-following' mentality
According to Sharma, the Indian startup economy is imperilled by the 'fast-following' mentality among entrepreneurs. "More often than not, companies are formed because other ventures are built on the same model," he said.

"I am a fan of entrepreneurs who build companies and trends and not their ideas. Incredible entrepreneurs try to address larger problems," he said, adding that exceptional firms are often built out of the self need of entrepreneurs.

Fear of down round
Answering a question on down round (where investors purchase stock from a firm at a lower valuation than the valuation placed on it by earlier investors), Sharma said down round is not bad if a company believes that it has a strong business model.

"For startups, not going for a funding round because valuation may be less does not make sense. If founders give too much attention to everything the world says, they are in the wrong business. The first rule of being an entrepreneur is to be thick-skinned, as they get punished no matter what they do," said Sharma.

In a constrained funding environment, a precise investment pitch helps the investors assess a venture. "It is better if a business model can be explained in a few words. Too many words do not appeal to me," he said.

An active angel
Throwing light on his investment mantra, Sharma—who has been among the most active angel investors in the country with 37 investments to date—said, "There is a layer of investments where I like to put my money despite what my cash flow suggests. Then there is another kind of money that I give to entrepreneurs who are really cool but don't get funding."

According to Sharma, sometimes investors have to look at the individual as much as the business model. "You have to invest in the driver and not in the bus or the destination," said Sharma.

Opportunities galore
India will be home to 200-300 million connected people soon and there is a big business potential to be explored around this, Sharma said. Businesses revolving around e-commerce, messaging and financial services will account for a major part of the emerging opportunity. Likewise, logistics as a space has a lot of scope for disruption and innovation, he said.

According to Sharma, it is a misconception that Indian consumers are averse to paying. "If you have a method to charge a rupee, the consumer is not averse to paying," he said.